Investors Back Brent To Break $80

For more than a week, Brent Crude prices have been flirting with the $80 threshold as market participants have focused on the shrinking oil supply from Iran and continuous drop in Venezuela’s production.

For a couple of weeks now, investors, traders, and money managers have been increasingly bullish on Brent Crude, while Permian constraints have made them trim bets that WTI Crude prices would rise.

The bullish sentiment in Brent was further stoked this week by reports that OPEC’s largest producer and leader Saudi Arabia may now be comfortable letting oil prices rise above $80 a barrel—a possible sign that the Saudis may not be rushing to balance supply if more Iranian oil comes off the market this month and next.

The reported Saudi comfort with an $80-plus Brent price has spread to oil investors and traders. In just two days, September 17 and 18, open interest in call options—options to buy—Brent at $80 and $85 a barrel expiring next week surged by almost 45 percent, according to data by the Intercontinental Exchange compiled by Reuters.

The open interest in Brent options at $80 and $85 is now nearly half of all November call and put options at prices between $60 and $100, suggesting that investors are betting that Brent prices will cross the $80 mark very soon.

Hedge funds and other money managers raised their bullish bets on Brent in three consecutive weeks, extending their net long position in Brent by 23 million barrels to 440 million barrels in the week to September 11, exchange data compiled by Reuters market analyst John Kemp shows.

The net long position—the difference between bets that prices will rise and bets on a drop—has increased by a total of 116 million barrels over the past three weeks.

Money managers’ sentiment toward WTI, however, is not so bullish. Bets that WTI would rise dropped in eight of the past ten weeks, according to data from the U.S. Commodity Futures Trading Commission compiled by Bloomberg. Hedge funds cut their net long position in WTI by 5.1 percent to 346,327 futures and options for the week to September 11.

While WTI Crude prices are much more influenced by U.S. inventory reports and current concerns that pipeline bottlenecks will stifle the flow of Permian oil to the U.S. Gulf Coast for exports, Brent crude prices are moved by the global supply and demand picture and short-term expectations of the (in)balance of this equation. The exception to this rule is when Saudi Arabia, OPEC, or Russia decide to drop some hints, comments, or reports, or when U.S. President Donald Trump takes to Twitter to complain of the high oil prices and demand that the cartel reduce pricing—like he did again today.

This week, it was Saudi Arabia that was reportedly okay with allowing Brent prices to rise above $80 amid signs that Iranian oil exports are already noticeably dropping and expected to further decline as the starting date for U.S. sanctions approaches.

Next week, it will be the statements and reports after this coming weekend’s meeting of OPEC and non-OPEC representatives to review the state of the oil market. The cartel and its allies are expected to discuss how to distribute among themselves the production boost they agreed on in June, with Iran vehemently opposing the idea of any pact participant making up for shortfalls elsewhere.

While OPEC and friends discuss supply, they will also be closely looking at demand forecasts for the fourth quarter and early next year. OPEC Secretary General Mohammad Barkindo has recently said that global oil demand had started to face some headwinds.

The escalating U.S.-China trade war, the emerging markets crises from Turkey to Argentina, and weakening currencies in major Asian oil importers like India, are all expected to cap rising oil prices as global economic and oil demand growth could suffer if Brent crude breaks above the $70-$80 band.

But so far this week, the oil market has been paying more attention to tightening supply than concerns about demand.